Creating economy is a key entrepreneurial skill. Its something that is entirely possible irrespective of the environment you trade in. It needs an adept, curious mind and courage. It also needs a well developed and relevant asset stack.
This is about you. Your track record, relationships, skill, reputation and resources. It’s something some people are born with through the families they are born to. Most of us however need to develop it overtime. An asset stack’s relevance is only useful if it’s aligned to the venture you are going to create. For example, a great understanding, relationships and skills in the food sector, which make a big asset stack, are not valued in the mining sector.
Frameworks to craft new economy
All businesses work in a value chain made up of the many activities that add value to the final service or product for customers. Understanding the value chain forms a good theoretical framework to analyse opportunities in that sector. But that alone is not enough, understanding people and social dynamics is vital too. Combining the insights from both are the building blocks to spotting how to create new economy in the sector.
An Example of how it’s working
I’m going to talk about a client that we work with in the USA. They have recently gone to market with their offering that has been 3 years in the making. They are limiting their offering to a few locations in the US in order to further prove it and develop it before going to full scale. They are in the shampoo industry.
The Shampoo Industry
In the traditional, established and accepted value chain dominated by the big shampoo brands, the steps include, for example, the following:
Lab and Research -> Market analysis & Segments -> Design & Coms -> Costs & Pricing -> Distribution & Merchandising -> Sourcing & Procurement -> Demand Forecasting -> Marketing & Sales -> Manufacture -> Promotion & Endorsements
Success here requires that each of these activities are optimised in their performance. Several key measures are used, for example; costs are impacted by volumes of raw materials. New products must then match big market segments. Afterall, everyone needs shampoo. Brand is driven by packaging and endorsements and needs to be matched by distribution and so it goes. All the way through, value is added and so are costs. In distribution, getting the 100,000 bottles of shampoo out of the first run into the market goes through two or four links from distribution centres to wholesalers to merchandisers to retailers to you the customer. More cost is added. And more cost is added too to the endorsements and marketing efforts to get the shampoo into the view of you, the customer. To get the many parts that make up the service and product, these companies organise themselves into silos. Marketing, research, procurement, manufacture etc. they all have chiefs and they all hold tightly onto their domains. Their power lies in data and budgets.
Structure determines behaviour
These businesses rely on predictable demand, long lead times, standard products for mass markets, stable suppliers and dedicated production lines. Chopping and changing production is costly and a big deal. They are all measured on monthly reporting.
Entering and competing in this space is hard. You can see, feel and hear the weight behind the momentum required to compete with the big, established players. Retailers lock you out through unaffordable deals and consumers are hard to reach without them. It’s exhausting but that’s the way it is.
Our hair changes over time and so should our shampoo. Unless its all the same. But marketing tells us it’s not and science does too. So, we constantly face a knowledge gap and its hard to resolve. You need to go and visit a salon and get an expert opinion which mostly rests on the brands the salon carries. You need to get shampoo too. This means time, cars, parking, queues and aggravation. Errands sounds laborious and inconvenient as a word because they are.
And that’s the material you must work with if you want to challenge this industry. It is well serviced; hard to compete with on prices and access; and with fragmented consumers impossible to reach at scale.
This team wanted to do just that: made up of a hairdresser with 30 years of experience, a value chain expert and a production expert. They tried to get in with a new brand and failed twice. When we met, we decided that doing it the way it has always been done is not going to work for them despite their asset stacks. So, we did it differently and raised some money to make it happen.
Creating new economy
Instead of their value chain being linear and in sequence, its circular and simultaneous. Imagine a central core or brain. It’s a cloud ERP system and linking into it we have:
- A hair analysis app
- A robotic, automated production line
- Sourcing and procurement
- Digital design and packaging
- Marketing and inside-sales demand creation
- To your door distribution and delivery
- Customer driven engagement and endorsements
All these individual capabilities link into the ERP cloud of which you, the customer is the centre of attention.
A new agile structure
They have designed this business to rely on variable demand, short lead times and product cycles, real-time live suppliers and all share access to and generate data to present a real-time live experience of the customer. This all procures the following experience:
New consumer experiences
You analyse your hair from your phone, anywhere, anytime. It recommends the most appropriate treatment based on that analysis at that time. It’s private and discrete. From there, the shampoo treatment, now customised to your hair alone is formulated and prior to making it, it offers you the chance to personalise your packaging: “Bruce’s Shampoo”. It offers the shampoo to you after that for $18 with a promise of 24 hour delivery to your door. Once bought, the app confirms your receipt of the product and asks what it feels like, smells like and how your hair looks. It’s You Shampoo. You look and feel great and in your response is a real-time endorsement. This amplifying consumption is tuned into a monthly buy pattern of the brand because you are encouraged to promote and share it by way of a discount on your next purchase. This happens easily because the shampoo will eventually offer this through a membership translating the multiple once-off purchases into a lifetime annuity revenue relationship.
A new economy was created. It wasn’t shampoo. It wasn’t clean fresh hair. It didn’t exist before. Shampoo is the commodity, cost was the problem, time and convenience are the experience. A new economy was created, and we call it the experience economy.
Any sector or industry is open to being reinvented and redefined. It simply needs love, passion, determination, courage and the right combination of asset stacks.
We obsess about this at Aurik. Working with businesses that generate average annual revenues between R12m and R300m, the competition in this segment of the economy is fierce. Competition that requires innovation as a survival response, not a luxury. To make this happen, work with us. Together, our assets stacks will be formidable.